In this month’s President’s Letter, I am going to address the professional work requirement for membership in the CMT Association.

Per the Bylaws, Article 2.01, Section (C), items (i) and (ii), an applicant for Membership must be employed as an investment professional as of the date of application and have at least three years of approved professional work experience. Furthermore, Article 2.02, Section (A), item (i) states that to be granted the CMT Charter, one must be a Member.

While the CMT Association has grown and evolved over the years, our mission – our “reason for being” – has not changed. Definitely, without question, we exist to promote the use of Technical Analysis. That is why the Association was originally formed and is the key reason we have remained relevant all these years.

But, our mission is not only to promote the use of Technical Analysis. There are two additional components, or facets, to our mission that are extremely important to understanding why we exist and what we aim to accomplish as a group.

1. We aim to attract and retain a membership of professionals devoting their efforts to using and expanding the field of technical analysis and sharing their body of knowledge with their fellow members.
2. We will establish, maintain, and encourage the highest standards of professional competence and ethics among technical analysts.

These three items – promote TA, have professional members, and maintain ethical standards – compose our mission statement. Importantly, the mission statement not only explains who we are and what we are about, but it also does a good job of defining what we do not aim to be.

Because computers have made it easy to perform Technical Analysis by instantly plotting indicators on the screen, Technical Analysis has become an extremely popular tool among individual investors, or “retail” investors, over the past 30 years or so. These are people who do not have careers in finance and typically manage their own pools of capital to augment other sources of income.

The CMT Association does not aim to be a source of educational content and networking opportunities for non-professional investors. Per our mission statement, we intentionally focus on serving financial professionals to help them successfully use Technical Analysis in their careers.

That being said, many people who are just learning about Technical Analysis for the first time may be thinking about a career in Finance because of their interest in TA and trading. Often, we are asked by CMT Program candidates how they may qualify for membership if they do not have the required minimum of three years of work experience in Finance. As they sometimes explain, the very reason they are pursuing the designation is to land a decent job in Finance. So, how can they attain job experience if they need the CMT designation to do so? It appears to be a similar conundrum as credit card companies requiring you to have a good credit history before they issue you a card, but without a card you cannot obtain a good credit history.

Like a post-graduate degree from a university (e.g., an MBA), a professional designation can certainly elevate one’s attractiveness to employers. Keeping in mind the well-defined mission of the CMT Association, our requirement that members have a minimum amount of professional financial work experience is necessary and we must be uncompromising in its application. The CMT designation proves to employers that you possess a thorough knowledge of Technical Analysis concepts and have a competent ability to apply them. But, it cannot be the only requirement of membership in the Association.

The unfortunate truth for CMT candidates who have yet to get a job in Finance is that you will need to wait to apply for membership until you can satisfy the work requirement. But remember, this does not require you have a job in trading or investing per se. Your work experience just has to be related to the field of Finance in some capacity. Alternatively, Affiliate Member status gets you access to the CMT Association’s educational programming, ethics awareness, and helps you build your network of TA professionals, but does not require work experience. For CMT Program candidates, Affiliate membership includes reduced pricing on CMT Exam registration.

I hope this helps clarify what might appear to be a confusing requirement for membership in the CMT Association.

Now, with that topic behind us, I want to recognize the contributions of the previous Editor of Technically Speaking, Michael Kahn. Mike is a Senior Market Analyst at the famed Lowry Research Corporation in North Palm Beach, Florida, which was previously owned and run by Paul Desmond, Past President of the CMT Association, a founder of AAPTA, and winner of the Charles H. Dow Award.

In case you did not know, Mike wrote for Barron’s and MarketWatch for many years and was (is) one of the shining stars of the CMT Association. I personally would use Mike’s articles to annoy coworkers about the usefulness of Technical Analysis, which generally went over very well. So, I sort of feel like we all owe Mike for being one of the faces of Technical Analysis out there proving to the world why we do this stuff. On top of that, he did a fantastic job producing our newsletter over the years.

I wish you the best of luck in your future endeavors, Mike. Thank you!

I was asked to write an article on how we use charts in our investment selection process from the perspective of a hedge fund manager. The answer is, a majority of analysis comprises of fundamental analysis while technical barometers are used to assist with entry and exit timing. So here is how we use Technicals to identify our levels.

PHASE 1 – The Market:

On a technical basis, we start “top down” – with the general indices – to get a sense of whether it makes sense to be aggressively adding risk or lightening up. Since no single indicator or oscillator is foolproof, we try to look at a few dozen to see if they are pointing to the same probabilities – or diverging in their readings.

While many technical analysts prefer to buy when there is high relative strength and “blue skies” on “breakouts,” we prefer to buy high-quality durable franchises when they are on sale. We are looking for periods when selling is at or near exhaustion versus buying when everyone is already clamoring for the stock or sector. While this may require slightly more patience – as building bottoms can take time – if you have done proper fundamental analysis and know what you own (as well as understand the time value of money), buying quality (when trading below intrinsic value) and selling when the masses are exuberant for the company (after it has exceeded intrinsic value), is a process that has created material wealth for practitioners over many generations and through many cycles. Here are a handful of indicators we look at to get a feel for the general market:

PHASE 2 – Sector Rotation:

Once we have a feel for the general market climate, we drill down to see which sectors are on sale.  When we have determined what is at/near selling exhaustion – we do deep-dive fundamental analysis to determine WHY. Sometimes stocks and sectors are cheap for a reason. We look to identify catalysts that will turn the tide in a reasonable amount of time. We use sector barometers like percent of stocks in a sector above their 20 and 50 day moving averages, Bullish Percent (by sector), and ratio charts of the sector relative to the general indices. Here are some barometers that we go through for each sector to identify potential opportunities:

PHASE 3 – Stock Selection:

After we have determined the climate of the general indices and identified sector(s) that may be offering the greatest opportunity, we run a simple “oversold” (relative strength) screen to see a few dozen large cap, high quality companies, in the targeted sector. Then the real work begins to find those franchises that are cheap for a reason (to avoid), or cheap due to sector rotation or some short-term bad news/exogenous event that has caused it to be misappraised in the short term:

Can technical analysis complement value investing? Yes, indeed.

Fundamental practitioners are often grouped into value or growth styles of investing, while within the technical community the corollary styles are momentum vs mean reversion. In Episode #10, we speak with Canada’s foremost market expert Larry Berman, CMT, CFA who shares a compelling perspective on using technical analysis tools to position his funds toward undervalued securities.

Dogmatic believers in any style can consider this quote from the episode:

“There is no right or wrong in what we do. It’s just how you do it.

And results are results.” – Larry M. Berman, CMT, CFA

Fill the Gap covers a lot of ground this month, including:

• How fund managers can think about risk and objective outside the box,
• Details on a multi-factor diffusion model that combines technical, fundamental, and cyclical factors
• The behavioral implications of questions like “is China investable?”
• Why “Thinking in Bets” is all any practitioner can do in a market of infinite uncertainties

Larry gives concrete examples of how to use a multi-timeframe perspective to locate mean reversion opportunities, and explains how technical analysis can help investors avoid “value traps.”

Mr. Berman appears weekly on BNN’s Berman’s Call where he blends fundamentals with expert technical analysis to help Bloomberg viewers uncover opportunities in the marketplace. He is a Co-Founder of ETF Capital Management and The Independent Investor Institute — an organization dedicated to providing unbiased education to Canadian investors. With nearly twenty-five years of investment industry experience, Larry is an accomplished money manager across the equity, commodity, foreign exchange, and fixed income markets.

To better understand the concepts covered and current market commentary, we recommend reviewing the supplemental resources accompanying this episode using this link: go.cmtassociation.org/ftge10